Facing $253.6 million in troubled loans, Webster Financial Corp. is issuing $225 million in preferred stock to raise cash.
The parent of Webster Bank reported just shy of $139.7 million in non-performing loans at the end of the first quarter, and another $113.9 million in loans that are still accruing interest but are at least 30 days overdue in payments. With a total of $12.5 billion in loans listed on its asset sheet, the problem loans account for 2 percent of the total.
“A 2 percent ratio is significant,” said John Carusone, president of the Bank Analysis Center in Hartford. Also significant, he added, is that the bank’s reported reserve for credit losses – prior to the stock issue – was just $189.8 million.
“They’re not alone. They’re going through some choppy waters,” Carusone said. “They’re nonetheless a strong bank, but they’re experiencing difficulties which are endemic to the banking industry in particular and the economy in general.”
The Waterbury, Conn.-based bank has 181 branches, with 139 in Connecticut, 24 in Massachusetts, 10 in Rhode Island and eight in New York.
James C. Smith, the bank’s chairman and chief executive officer, stressed that issuing the stock is a matter of being cautious, and not “an outright need.”
“In uncertain times – and right now there is a lot of economic uncertainty – there’s capital market volatility,” Smith said. “More capital is better.”
“We believe that a fortressed balance sheet is a valuable asset in today’s environment. And that’s what this is about,” Smith added. “We want to have it to protect us against the unforeseeable. We’re not protecting ourselves from something we know is going to happen. We’re protecting ourselves against the unknown.”
The bank plans to reward investors in the $1,000-per-share preferred stock with quarterly payments of 8.5 percent, pending approval by the bank’s board of directors.
“This is a fully priced issue, where Webster had to pay up to make the issue happen,” Carusone said. Opting to raise the capital with preferred stock “gives recognition to the fact that now is not an ideal time to sell common stock,” he added.
The company’s share price has taken a beating over the last year, falling from a 52-week high of $46.40 in September to a closing price of $22.18 on Thursday – the day the bank announced it was issuing $225 million in preferred stock. As of Friday morning, the stock had fallen further, trading at $20.94.
Smith maintained that the bank has more than sufficient capital.
“Webster is well capitalized – well in excess of ‘well capitalized’ [by regulatory standards] on all capital ratios,” Smith said.
The bank’s Tier 1 capital ratio – a measure of a bank’s financial strength – was pegged at 8.8 percent at the end of the first quarter. That’s more than double the amount required by the Federal Reserve Board and the Office of the Comptroller of Currency. Webster’s position also exceeds the regulators’ “well capitalized” standard of 6 percent. Webster’s ratio looks to get stronger, too, as the preferred stock issuance counts as Tier 1 capital.
While the first-quarter report shows some signs of the bank’s fiscal strength, it also highlights a growing problem with nonperforming loans.
The amount of nonperforming loans grew from $58.9 million at the end of the first quarter of 2007 to $139.7 million at the end of the first quarter for 2008. For those same periods, respectively, the bank has set aside credit loss provisions of $3 million and $15.8 million.
“There was a [first-quarter] loan loss provision of about $16 million – significantly bigger than in other quarters, but I think you’d agree [it’s] not significant enough to threaten the earnings ability of the company,” Smith said.
